Dentists need to plan for retirement, too

Retirement planning for physicians, doctors and other professionals

Professionals, such as doctors and dentists, are a lot like you and me. They have to plan for retirement too.

But unlike you and me, these professionals have access to a wide variety retirement-planning tools and techniques. They also have a few more retirement-planning problems that other retirement savers typically don’t have.

“Both professions have their challenges,” said Kevin Meehan, a certified financial planner with Wealth Enhancement Group in Itasca, Ill.

What are some of the retirement-planning challenges and issues that professionals should consider?

Seeking balance

According to John Smith, a certified financial planner with Balasa Dinverno Foltz in Itasca, Ill., doctors and dentists, and others in similar professions, must strike a balance between protecting their assets from lawsuits and creating a tax-efficient portfolio.

For instance, he said doctor and dentist typically put as much of their future retirement savings into a qualified retirement plan which is protected against lawsuits,” said Smith. “However, the end result at retirement is often times a doctor or dentist having a disproportionate amount of net worth in retirement accounts, which are then taxed as ordinary income when withdrawn for spending needs.”

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This, said Smith, often results in the professional being “trapped” in a very high marginal tax bracket during their retirement years and therefore result in excessive income taxes being owed without the flexibility to avoid this.

“The ‘tax cost’ of this can be a very expensive trade off for what in their minds is a good way to protect their assets from lawsuits during their working years and the result is them then having to save a lot more for their retirement needs than would have otherwise been necessary had they been focused on what they ‘get to keep’ after taxes,” said Smith.

Still, there those who suggest that, depending on a variety of factors, doctors and dentists consider maintaining their retirement/employer assets in their existing plan vs. rolling over to an IRA. “The ERISA plans may offer a greater level of protection against creditors,” said Kevin O’Laughlin, a certified financial planner with Affiance Financial, a financial planning firm in St. Louis Park, Minn.

Speaking of pension plans

Unlike most working Americans, says John Hauserman, a certified financial planner and creator of RetirementQuest, a Marriottsville, Md.-based education website, physicians and dentists can use many different types of retirement plans, such as age-weighted profit-sharing and defined benefit plans, to increase the size of their nest egg.

“The number one issue I deal with regarding professionals involves the use of actuarial pension plans which can enable much higher retirement plan contributions,” said Hauserman. “I find that in many cases brokers don’t suggest them and I believe it is due to the increased complexity and perhaps their broker-dealers have wanted to avoid the assumption of fiduciary responsibilities.”

Others agree that physicians and dentists can, but often don’t, take advantage of the high deferral limits on customized retirement plans, “Most doctors don’t realize how much they can use older tax law to maximize the potential of contributing six-figure amounts,” said JJ Burns, a certified financial planner and president and CEO of JJ Burns & Co. in Melville, N.Y.

Indeed, doctors have plenty of options when it comes to designing their retirement plan. For instance, Burns said, they can set up retirement plans not just with their primary business but also with affiliated businesses they might own. “Most doctors don’t know about this,” said Burns, who also warned that government audits are likely when you set up multiple retirement plans.

Burns also said these professionals should consider creating retirement plans that include their employees. “Doctors typically don’t include employees or include them too much,” said Burns. “Better team building can happen in practices that embrace retirement plan education, too.”

Cash flow is king

The need to create tax-efficient income in retirement is especially important for professionals that have larger-than-average income streams during their working years. In 2012, for instance, the median pay for physicians and surgeons was $187,200 a year, according to the Bureau of Labor Statistics. And, the median pay for dentists was $149,310 a year. (Of note, the average net income for an independent private practitioner dentist who owned all or part of his or her practice in 2009 was $192,680 for a general practitioner and $305,820 for a specialist, according to the American Dental Association.

“Cash flow is a huge concern and successful doctors and business owners are used to a powerful income stream and need a lot of help navigating retirement where they don’t have the comfort of a steady paycheck,” said Paul Jarvis, a certified financial planner with United Capital Financial Advisers in Fargo, N.D.

Meehan noted that most of their retirement income will come from assets, but that dentists are different from physicians. “As the general dentist does not make a very high six-figure income few have saved enough to replicate income in retirement,” he said. “Doctors on the other hand typically make more money and live larger. The spread of working-to-retired income is that much higher.”

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